FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________to ____________
Commission File Number: 0-27552
REALCO, INC.
(Exact name of small business issuer in its charter)
New Mexico 85-0316176
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1650 University NE, Suite 100, Albuquerque, NM 87102
(Address of principal executive offices) (Zip Code)
505-242-4561
Issuer's telephone number, including area code
Not Applicable
(Former names, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months ( or for such shorter period that the registrant was
required to file such reports ), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No___
The number of shares the registrants no par value common stock, the issuers only
class of common stock outstanding as of August 7,1996 was 2,845,000
Transitional Small Business Format (check one) Yes [ ] No [XX]
PART I
Item 1. Financial Statements
REALCO, INC.
CONSOLIDATED BALANCE SHEETS
( UNAUDITED)
June 30, Sept. 30,
1996 1995
---------- ---------
ASSETS
Cash and cash equivalents .................. $ 5,417,884 $ 642,829
Restricted cash ............................ 599,084 483,144
Securities available for sale .............. 224,070 225,935
Accounts and notes receivable .............. 3,583,501 872,927
Inventories ................................ 9,974,897 6,265,812
Property & equipment (net) ................. 766,947 819,846
Investments - equity method ................ 843,363 720,760
Deferred income taxes ...................... 62,215 59,230
Other assets ............................... 1,648,282 690,826
------------ ------------
23,120,243 10,781,309
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable .............................. $ 48,871 176,002
Lease obligations .......................... 210,015 275,371
9.5% subordinated notes .................... 5,750,000 0
Construction advances and notes
payable, collateralized by inventories ... 3,461,339 4,078,804
Accounts payable and accrued liabilities ... 2,055,493 1,393,401
Escrow funds held for other ................ 599,084 483,144
------------ ------------
Total liabilities ........... 12,124,802 6,406,722
Stockholders' equity
Series A preferred stock - authorized,
83,000 shares; issued and outstanding,
82,569 shares ............................ 825,690 825,690
Series B preferred stock - authorized,
230,000 shares; issued and outstanding,
222,859 shares ........................... 2,223,590 2,228,590
Series C preferred stock - authorized,
80,000 shares, issued and outstanding,
none ....................................... -- --
Common stock no par value; authorized
6,000,000 shares, issued and
outstanding, 2,845,000 shares ............ 7,712,461 1,229,750
Retained earnings .......................... 239,152 82,987
Unrealized gains (losses) on available
-for-sale securities, net of tax ........... (5,452) 7,570
------------ ------------
10,995,441 4,374,587
------------ ------------
$ 23,120,243 $ 10,781,309
============ ============
See accompanying notes to consolidated financial statements.
REALCO, INC.
STATEMENTS OF OPERATIONS
( UNAUDITED)
Three Months Three Months
Ended Ended
June 30 June 30
1996 1995
---- ----
REVENUES
Brokerage commissions and fees ................ $ 2,817,629 $ 2,326,960
Sales of homes ................................ 2,734,670 3,944,458
Sales of developed lots ....................... 163,767 18,169
Equity in net earnings of investees ........... 117,950 51,841
Interest and other, net ....................... 287,247 1,657
----------- -----------
6,121,263 6,343,085
COST AND EXPENSES
Cost of brokerage revenue ..................... 1,969,437 1,587,096
Cost of home sales ............................ 2,557,253 3,710,929
Cost of developed lots sold ................... 151,925 25,034
Selling, general and administrative ........... 1,063,879 927,627
Depreciation and amortization ................. 112,775 69,553
Interest and other expense .................... 128,169 10,424
----------- -----------
5,983,438 6,330,663
----------- -----------
Income (loss) before provision for income
taxes and cumulative effect change in
accounting principle ......................... 137,825 12,422
INCOME TAX EXPENSE (BENEFIT) .................... 50,620 14,555
----------- -----------
Income (loss) before cumulative effect
of change in accounting principle ............. 87,205 (2,133)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .......................... -- (30,286)
----------- -----------
NET EARNINGS (LOSS) ........................... $ 87,205 $ (32,419)
=========== ===========
Earnings (loss) per common share
Earnings (loss) before cumulative effect of
change in accounting principle ................ $ 0.03 $ (0.01)
Cumulative effect of change in accounting
principle ..................................... -- (0.01)
----------- -----------
Net earnings (loss) per common share .......... $ 0.03 $ (0.02)
=========== ===========
Weighted average shares outstanding.............. 2,845,000 1,845,000
=========== ===========
See accompanying notes to consolidated financial statements.
REALCO, INC.
STATEMENTS OF OPERATIONS
( UNAUDITED)
Nine Months Nine Months
Ended Ended
June 30 June 30
1996 1995
---- ----
REVENUES
Brokerage commissions and fees ................ $ 7,963,924 $ 2,959,379
Sales of homes ................................ 6,729,027 4,794,125
Sales of developed lots ....................... 871,859 18,169
Equity in net earnings of investees ........... 255,610 20,967
Interest and other , net ...................... 593,458 55,600
----------- -----------
16,413,878 7,848,240
COST AND EXPENSES
Cost of brokerage revenue ..................... 5,537,922 2,046,183
Cost of home sales ............................ 6,116,659 4,477,600
Cost of developed lots sold ................... 864,808 25,034
Selling, general and administrative ........... 3,141,838 1,250,387
Depreciation and amortization ................. 273,003 90,574
Interest and other expense .................... 242,984 12,553
----------- -----------
16,177,214 7,902,331
----------- -----------
Income (loss) before provision for income
taxes and cumulative effect of change in
accounting principle ......................... 236,664 (54,091)
INCOME TAX EXPENSE (BENEFIT) .................... 80,500 (15,230)
----------- -----------
Income (loss) before cumulative effect
of change in accounting principle ............. 156,164 (38,861)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .......................... -- (14,416)
----------- -----------
NET EARNINGS (LOSS) ........................... $ 156,164 $ (53,277)
=========== ===========
Earnings (loss) per common share
Earnings (loss) before cumulative effect of
change in accounting principle ................ $ 0.07 $ (0.02)
Cumulative effect of change in accounting
principle ..................................... - (0.01)
----------- -----------
Net earnings (loss) per common share .......... $ 0.07 (0.03)
=========== ===========
Weighted average shares outstanding ............. 2,381,496 1,845,000
=========== ===========
See accompanying notes to consolidated financial statements.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Nine Months
Ended Ended
June 30 June 30
1996 1995
---- ----
Cash flows from operating activities
Net profit (loss) ............................ $ 156,165 $ (53,277)
Adjustments to reconcile net profit to net
cash used by operating activities
Depreciation and amortization ............... 273,003 90,574
Distributions from investees in excess
of (less than) net earnings ............... (60,115) (20,967)
(Gain)loss on sale of securities ............ (77,774) 591
Cumulative effect of change in
Accounting principle ..................... -- (14,416)
Change in operating assets and liabilities
(Increase) in accounts receivable ........ (2,710,574) 44,380
(Increase) in inventories ................ (3,709,085) 1,328,398
(Increase) in other assets ............... (47,791) (144,355)
Increase (decrease) in account payable
and accrued liabilities ................ 533,556 87,503
Increase in deferred tax asset .......... (2,985) (4,407)
------------ ------------
Net cash (used) provided by operating
activities ................................ (5,645,600) 1,314,024
------------ ------------
Cash flows from investing activities
Purchases of property and equipment .......... (150,261) (59,692)
Proceeds from sale of securities ............. 144,757 72,814
Purchases of equity securities ............... (62,488) --
Purchases of securities available for sale ... (30,000) (43,009)
Cash acquired from purchase of Old Realco .... -- 469,932
------------ ------------
Net cash provided from investing activities .... (97,992) 440,045
------------ ------------
Cash flows from financing activities
Construction advances and notes
payable, net ................................ (744,596) (1,508,007)
Payments on capital lease obligations ........ (65,356) (23,680)
Proceeds from issue of subordinated notes .... 5,160,625 --
Proceeds from issue of common stock .......... 6,172,974 --
Purchase of Series B preferred stock ......... (5,000) --
------------ ------------
Net cash provided (used) from financing
activities .................................... 10,518,647 (1,531,687)
------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS ......................... 4,775,055 222,382
Cash and cash equivalents at beginning of
period ........................................ 642,829 1,113,534
------------ ------------
Cash and cash equivalents at end of period ..... $ 5,417,884 $ 1,335,916
============ ============
See accompanying notes to consolidated financial statements.
REALCO, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
( UNAUDITED)
SUMMARY OF SIGNIFICANT ACCOUNTING PRACTICES
The consolidated balance sheets as of June 30, 1996 and September 30, 1995, the
statements of operations for the three months and nine months periods ended June
30, 1996 and 1995 and the statements of cash flows for the nine month periods
ended June 30, 1996 and 1995 have been prepared by the company without audit. In
the opinion of Management all adjustments (which include normal recurring
adjustments) necessary to present fairly the financial position as of June 30,
1996 and September 30, 1995 results of operations for the three and nine month
periods ended June 30, 1996 and 1995 and cash flows for the nine month periods
ended June 30, 1996 and 1995 have been made.
Certain information and footnotes normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Registrants registration statement. The results of
operations for the period ended June 30, 1996 are not necessarily indicative of
the operating results for a full year.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed using the weighted average number of
common shares outstanding of 1,845,000 for the three and nine months periods
ended June 30, 1995 and 2,845,000 and 2,381,496 for the three and nine month
periods ended June 30, 1996, respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL:
The Company's revenues are generated through commercial and residential real
estate brokerage services, general residential home construction sales, and
various financing activities.
The financial information for the nine months ended June 30, 1996 is not
comparable to the nine months ended June 30, 1995 because in March, 1995, The
company changed its business with the acquisition of Old Realco, a real estate
brokerage services and general residential home construction company. The
financial information for the three months ended June 30, 1996 is comparable to
the three months ended June 30, 1995. Revenues for the Company prior to the
acquisition in March 1995, were generated through various financing activities
in which the Company has been continuously involved since its inception 1n 1983.
Since March 1995, the Company's operating results have included the operating
results of the acquired company.
Pursuant to a prospectus dated February 2, 1996, the Company publicly sold one
million common shares of its stock and 5,000 units, each Unit consisting of
$1,000 in principal amount of a 9.5% Subordinated Sinking Fund Note and 120
Warrants to purchase 120 shares of the Company's Common Stock. The Underwriter
for the Unit Offering exercised its over allotment privilege and sold an
additional 750 Units on behalf of the Company. The Company received from the
Underwriters approximately $11,444,000 a sum which represents the total sales
proceeds of the Underwriting less commissions and underwriters offering
expenses. The company expects that the net proceeds from the public offering in
addition to its existing operating bank lines will be sufficient to satisfy its
liquidity and capital resource requirements for the fiscal year 1996.
During this quarterly reporting period, gross cash and cash equivalents declined
by $1,634,633, while inventories and account receivable increased by $2,200,455
for the same period. Liabilities increased by $729,766 from the quarter ended
March 31, 1996. The decrease in cash and increase in liabilities for the current
period was primarily due to an increase in building lot inventory, increase in
spec homes held for sale and acquisition of approximately 98 lap top computers
for use by real estate agents of the Hooten/Stahl real estate marketing
subsidiary. The lap top computers are being leased to the Hooten/Stahl agents by
Great American Equity Corporation, another of the Registrant's subsidiaries.
In April, the Registrant's subsidiary Great American Equity Corporation,
announced it has begun to make available interim residential construction loans
to certain independent residential builders represented by the Company's
Hooten/Stahl subsidiary. This financing activity is being conducted through a
participation agreement with a bank with whom the Company has a working
relationship. In April, 1996, the Registrant announced it has concluded a joint
venture arrangement with CTX Mortgage Ventures, Inc., a subsidiary of CENTEX
Corporation, a New York stock Exchange listed company, through which the
Registrant and it's joint venture partner will operate a residential mortgage
company. Operations commenced on July 9, 1996 upon notification of regulatory
approval by the state of New Mexico, additional Federal approvals are expected
shortly, thereupon a complete range of mortgage products will be available.
The quarterly results ended June 30, did not improve significantly over the
previous reporting period, due to adverse new home sales activity for the
current quarter. The residential construction company experienced unexpected
slowness of sales and construction during this reporting period. The real estate
brokerage company and real estate development joint ventures experienced
improved net earnings. While the third and fourth quarter of the registrant's
fiscal period generally are considered the most active and hence most
profitable, unstable residential mortgage rates sporadically impact this segment
of the registrant's business. April and May new home sales activity was markedly
down while June and July activity improved. The Registrant began to employ such
marketing techniques as mortgage rate buy-downs, a practice whereby a home
builder pays to buy-down rates and make available to the residential home buyer
a more favorable financing package. While such marketing techniques improve
sales activities, its impact on profitability is adverse.
On July 24, 1996, the Registrant announced that it had acquired all of the
outstanding and issued common stock shares of Amity, Inc., an Albuquerque, New
Mexico based commercial general contractor. Amity, Inc. has been involved in the
construction of hotels, gaming casinos, restaurants, health facilities and
office buildings. In addition, it has been active in upscale residential remodel
and commercial tenant improvements. The Registrant will issue series "D", 3%
cumulative, convertible preferred stock in exchange for all of the issued and
outstanding common shares of Amity, Inc. The value of the preferred shares to be
issued by the registrant will be determined upon the completion of a two year
financial audit for the periods ended June 30,1996 and 1995, The audit is
expected to be completed by September 15, 1996, at which time the value of the
purchase consideration will be determined.
QUARTER ENDED JUNE 30, 1996 COMPARED TO QUARTER ENDED JUNE 30, 1995
REVENUES:
Brokerage commissions and fees were $2,817,629 compared to $2,326,960,
construction and lot sales were $2,898,437 compared to $3,963,627 during the
quarter ended June 30, 1996 compared to the quarter ended June 30, 1995. Income
from equity investees were $117,950 compared to $51,841 and revenues from
Company financing activities were $287,247 compared to $1,657 for the quarter
ended June 30, 1996 compared to the quarter ended June 30, 1995.
Results for the third quarter ended June 30, 1996, and third quarter ended June
30, 1995, includes full operating results from a real estate brokerage services
and general residential construction company acquired during March 1995. Results
for the nine months ended June 30, 1995 includes only four months of the
acquired entities' operations, therefore the nine months ended June 30, 1996
performance is not strictly comparable to its 1995 performance. Prior to the
acquisition of March, 1995, the Company's revenues were generated through a
variety of financing activities.
Brokerage commissions and fees as a percentage of total revenues for the
comparable quarters ended June 30, 1996 and June 30, 1995 were 46.0% and 36.7%,
construction and lot sales as a percentage of total revenue for the quarter were
47.4% and 62.5%, income from equity investees as a percentage of total revenues
for the quarter was 1.9% and 0.1%, and financing activities were 4.7% and 0.03%
of total revenues in the comparable quarters ended 1996 and 1995 respectively.
GROSS PROFIT:
The Company's gross margin from construction and lot sales was $189,259 during
the quarter ended June 30, 1996 compared to $226,664 during the quarter ended
June 30, 1995. The Company continued to increase its lot inventory during this
period because the Company believes it needs to increase construction sites in
strategic locations within the Albuquerque metropolitan area in preparation of
increased sales activity. The Company has undertaken to increase it's
speculative home inventory in various of its residential subdivisions and has
agreements to increase its building lot inventory through joint venture
arrangements with other developers in order to prepare for and satisfy the local
buying trend and to maintain a reasonable inventory to meet sales surges within
the new home buying cycle.
The Company's gross margin from brokerage commissions and fees, before selling,
general and administrative expenses of $848,192, for the quarter ended June 30,
1996 was 30.1% compared to a gross margin of $739,864 or 31.8%, before selling,
general and administrative expenses for the period ended June 30, 1995. The
percentage of gross margin recognized during the quarter represents and increase
of 14.6% over the gross margin of commissions and fees recognized during the
quarter ended June 30, 1995.
The gross margin from the financing activities of the Company are expected to
increase during the fourth quarter of the current fiscal year. Such projected
increases are due primarily to the commencement of additional financing
activities which includes residential construction loans to small independent
residential home builders and permanent residential mortgage loans to individual
home buyers. The Company began to market those services during the quarter ended
June 30, 1996. It is expected at this time that the costs associated with the
residential mortgage financing activities by the Company will be modest in
relation to the anticipated revenues.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
The percentage of selling, general, and administrative expenses to total
revenues during the quarter ended June 30, 1996, was 17.4%, compared to 14.6%
for the period ended June 30, 1995. The increase in selling, general and
administrative expenses were due to several factors, including continuing
expansion of the operations of the real estate brokerage and home construction
companies. Depreciation, amortization, goodwill, interest and other expenses for
the quarter was $240,944 for the quarter ended June 30, 1996 compared to $79,977
for the quarter ended June 30, 1995. The increase was due primarily to interest
expense associated with the subordinated notes issued as a part of the Initial
Public Offering which the Registrant completed on February 2, 1996.
The Company expects that the cost of selling, general and administrative expense
as a percentage of total Company revenue will gradually decrease assuming the
Company construction subsidiaries revenues increase through the reminder of the
fiscal period.
NET EARNINGS:
The percentage of net earnings to total revenues for the quarter was 1.4%, as a
result of the previously noted factors.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's principal sources of liquidity are cash flow from operation
activities, bank borrowing under both term and revolving credit facilities and
approximately $5,418,000 of the Registrants' current cash and cash equivalents.
During the quarter the Company had approximately $3,461,000 million revolving
interim construction and inventory line of credit with various bank in the
Albuquerque area.
Due to the public offering of common stock and notes as discussed previously,
the Company believes that the cash flow from its operations and the net proceeds
from the offering of its securities will sustain its operations and anticipated
internal growth during fiscal 1996.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to certain legal claims from time to time and is involved
in litigation that has arisen in the ordinary course of business. It is the
Company's opinion that it either has adequate legal defenses to such claims or
that any liability that might be incurred due to such claims will not, in the
aggregate exceed the limits of the Company's operations or financial position.
Insofar as known to management, there is no pending or threatened litigation
involving the Company or its assets.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On July 1, 1996, the Executive Vice President of the Company reduced a note
obligation to the Company of $100,000 by tendering 5,000, shares $10.00
liquidating value, series B, convertible and cumulative 3% preferred shares. All
accrued dividends since the issuance of the shares have been abated as per the
terms of the preferred stock agreements. The remaining balance of the note
payable by the Executive Vice President is $50.000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) There are no exhibits filed with this Report.
(b) On July 24,1996, a form 8-K was filed by the Company in which the
acquisition of Amity, Inc. was reported.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Realco, Inc.
BY: James A. Arias
---------------------------------------------
James A. Arias, President
BY: Melvin A. Hardison
---------------------------------------------
Melvin A. Hardison, Secretary\Treasurer
and Chief Financial Officer
DATE: August 12, 1996
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